Analysts bet bumper Turkish rate hikes on the way

Analysts at leading investment banks expect Turkey’s new economic chiefs to start ramping up interest rates next week as part of a major reset of the country’s economic policies.

President Recep Tayyip Erdogan, re-elected last month, has just appointed former US banker Hafize Gaye Erkan as the new central bank governor. She is his fifth since 2019. He has also picked Mehmet Simsek, a former deputy prime minister respected by international investors, as finance minister.

Turkey has a long track record of yo-yoing its interest rates, cutting them sharply and then raising them even faster every time a currency market crisis strikes.

Erdogan, a lifelong critic of high borrowing costs, pushed the central bank to cut its rates from 19 per cent two years ago to 8.5 per cent in the run up to last month’s elections.

The central bank will meet next Thursday. Below is what some of the big investment banks expect to see:

J.P.MORGAN

“We think that a policy rate hike to 25 per cent, from the current level of 8.5 per cent, for the June 22 MPC meeting is on the table along with forward guidance suggesting smaller rate hikes if needed.”

“We maintain our year-end policy rate forecast at 30 per cent, with risks on the upside. We forecast a recession in 2H23 on the back of a tightening in credit conditions.”

“The lira depreciated by 10.5 per cent against the dollar last week as a signal of a policy pivot to orthodoxy. The lira depreciation and a slowdown in domestic demand should improve the current account balance in 2H23. That said, inflation is likely to rise.”

DEUTSCHE BANK

“It is difficult to assess the precise reaction function at this point in time, but we would argue that the recent fast depreciation of the currency requires a credible first hike.”

“We would expect levels slightly below the current lira deposit rates (27 per cent) as adequate for the time being. This could be achieved via a one-off hike to 25 per cent or two consecutive hikes in June & July.”

“In the second scenario, we would expect an immediate hike close to 18 per cent-20 per cent, most likely closer to the upper-end of this, followed by another hike in July to 25 per cent.”

“We would not rule out the need for slightly higher rates in this cycle, but would not expect rates above 30 per cent. In any case.”

“In our view, a near term clearing level for the exchange rate of around 25 (lira to the dollar) is reasonable. Should USD/TRY reach this level, and authorities deliver a sizeable interest rate hike… we could see the possibility of a tactical period of lira outperformance.”

GOLDMAN SACHS

“We think a currency adjustment will be accompanied by a large front-loaded hike to the TCMB’s (central bank) marginal lending rate.”

“Turkish lira interest rates on deposits without FX protection have already repriced towards around 40 per cent and have largely de-linked from policy rates.”

“We think the incoming team will want to re-establish its marginal lending rate as the anchor for interest rates in the economy, and hence will raise it upfront towards deposit rates.”

“We are, however, sceptical that the marginal rate will be the repo rate, or that the repo rate will be used to help limit the shock of the repricing for banks and the corporate sector.”

“Once the exchange rate stabilises, we think the marginal rate can fall fairly quickly, and we expect it to fall to 25 per cent by end-year, although this requires a stabilisation of inflation expectations.”

MORGAN STANLEY

“With Mehmet Simsek’s appointment as Finance Minister and his initial remarks, we expect more conventional policies, including faster currency depreciation and higher policy rates.”

“We expect rates to reach 20 per cent in June and 25 per cent in August. Uncertainty remains very high as more policy guidance can be expected.”

“We might see smaller moves in the currency (compared to June 7 slump) until the authorities have their plans in place on monetary policy and other aspects of the economic programme – our strategists see USD/TRY around 28 at year-end.”

“Given Turkey’s past experience with relatively short-lived u-turns in interest rate policy, enhancing credibility will likely take time, but this pivot should rule out risk scenarios related to reliance on more unconventional measures, including stricter regulations on FX transactions, to sustain extremely low rates.”